Angel tax exemption cap hiked, definition of startup widened

In a two-pronged move to improve the fledgling startup eco-system, India on Tuesday raised the limit of angel tax exemption for startups, while revising the definition of such an enterprise.

Angel tax, the focus of a recent controversy, which has come to be called so since it largely impacts angel investments in startups, refers to income tax payable on capital raised by unlisted companies via the issue of shares, where the share price is seen in excess of the fair market value.

Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a startup in excess of its fair market value is taxable at over 30 percent.

As per an official notification on Tuesday, the exemption for angel tax for shares issued or proposed has been hiked to an aggregate limit of Rs 25 crore from Rs 10 crore.

“Considerations of shares received by eligible startups for shares issued or proposed to be issued by all investors shall be exempt up to an aggregate limit of Rs 25 crore,” Commerce Minister Suresh Prabhu announced on Twitter.

Prabhu told reporters the higher Rs 25 crore threshold aims to cover almost all angel investments as most listed companies will now able to invest in startups without angel tax.

“Consideration received by eligible startups for shares issued or proposed to be issued to a listed company having a net worth of Rs 100 crore, or turnover of at least Rs 250 crore will also be exempted,” a statement by the Department for Promotion of Industry and Internal Trade (DPIIT)said.

The definition of startups has also been widened. “Definition of #Startups has been widened. An entity shall be considered a startup up to 10 years from its date of incorporation instead of the existing period of 7 years,” Prabhu tweeted.

“An entity shall be considered a startup if its turnover for any of the financial years since its incorporation/registration hasn’t exceeded Rs 100 crore instead of existing Rs 25 crore,” he wrote on Twitter.

“All investments into eligible startups by non-residents, alternate Investment Funds — Category I registered with market regulator Sebi — shall also be exempt under Section 56(2)(viib) of the Income Tax Act beyond the limit of Rs 25 crore,” he said.

The Minister said valuation, which was a major concern for angel tax purposes, has been removed as a criterion.

The notification also sets down certain exceptions to the new rule. A startup cannot invest in building or land unless it is for its business or used by it for purposes of renting, or held by it as stock-in-trade.

It also cannot offer loans or advances, other than those where lending money is part of its business.

A startup also cannot make any capital contribution to any other entity or invest in shares, car, any vehicle or mode of transport that costs more than Rs 10 lakh.

Central Board of Direct Taxes Chairman Akhilesh Ranjan said these exceptions have been introduced to assuage the CBDT’s concerns that startups will neither be used for money laundering nor will receive investment from shell companies for tax evasion.